The US Treasury building in Washington. <\/p>\n
(Bloomberg) — A key interest rate for the US financial system jumped to the highest level this year \u2014 exceeding the Federal Reserve\u2019s target range for its own benchmark \u2014 as dwindling liquidity is exacerbated by Treasury auction settlements and quarterly corporate tax payments this week.<\/p>\n
The Secured Overnight Financing Rate \u2014 a one-day lending benchmark linked to activity in the market for repurchase agreements \u2014 rose to 4.51% as of Sept. 15 from 4.42% the prior session, according to the latest Federal Reserve Bank of New York data published Tuesday. That\u2019s the biggest increase in the fixing since Dec. 31.<\/p>\n
Rates on overnight financing used by banks and asset managers to borrow and lend to each other have been steadily rising as the Treasury is rebuilding its cash pile concurrently with the Federal Reserve reducing its balance sheet. Meanwhile, usage of one of the Fed\u2019s overnight lending facilities \u2014 long considered a measure of excess liquidity in funding markets \u2014 has dropped to a four-year low.<\/p>\n
<\/p>\n
The uptick pushed the spread between SOFR and the effective fed funds rate, which policymakers are expected to cut by a quarter point on Wednesday, to 18 basis points \u2014 the widest since Dec. 26. The fed funds rate is as of Sept. 12.<\/p>\n
It\u2019s 11 basis points above the rate the Fed pays on reserves parked at the central bank \u2014 currently 4.40%.<\/p>\n
\u201cFunding market conditions are still very stable,\u201d said Rishi Mishra, an analyst at Futures First Canada Inc. \u201cIf anything, we can say there that we are shifting closer to the slightly upward slopes of the reserves demand curve. This would mean larger fixings on all settlement and balance sheet dates.\u201d<\/p>\n
Persistently high overnight rates could put into question how much longer the Fed can continue unwinding its balance sheet \u2014 a process known as quantitative tightening \u2014 without draining essential liquidity from the financial system. Over time, they can also reduce the effectiveness of reductions to the central bank\u2019s target rate, just as the Fed is expected to resume its easing cycle.<\/p>\n
WATCH: Bob Michele previews the Fed decision.Source: Bloomberg <\/p>\n
The Fed has been winding down its balance sheet since 2022, in a bid to reverse trillions of dollars in asset purchases designed to stimulate the economy after the pandemic shock. In the process, it hopes to bring bank reserves kept at the central bank to a minimum level, considered as ample, which would be sufficient enough to prevent market disruptions.<\/p>\n
Officials this year slowed down the pace of balance-sheet reduction as reserves have been approaching that endpoint. Bank reserve balances currently stand at around $3.15 trillion, according to the latest Fed data. Fed Governor Christopher Waller recently estimated the minimum ample level to be around $2.7 trillion.<\/p>\n
Story Continues <\/p>\n
Benchmark rates are expected to remain under pressure as the government ramps up Treasury bill issuance after raising the debt ceiling in the summer, draining the Fed\u2019s overnight reverse repurchase agreement facility. On Tuesday, some 16 counterparties parked $18.8 billion at the so-called RRP, up from $17 billion the prior session.<\/p>\n
Yet. market participants are expecting a reprieve before volatility picks up again for quarter-end. That\u2019s because two long-dated cash management bills are slated to mature, resulting in a net supply paydown of $50 billion on Tuesday, in addition to the monthly influx of cash from government-sponsored enterprises in the coming days.<\/p>\n
\u201cRepo has normalized quickly this morning, which is somewhat encouraging,\u201d said Wells Fargo strategist Angelo Manolatos. \u201cPaydowns over the next two weeks provide some relief to the market before attention shifts to quarter-end.\u201d<\/p>\n
(Adds results of Tuesday\u2019s overnight reverse repo operation in 10th paragraph.)<\/p>\n
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\u00a92025 Bloomberg L.P.<\/p>\n","protected":false},"excerpt":{"rendered":"The US Treasury building in Washington. (Bloomberg) — A key interest rate for the US financial system jumped…\n","protected":false},"author":2,"featured_media":161453,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[37],"tags":[72553,98135,7904,28,98137,2800,5534,112,98138,98136],"class_list":["post-161452","post","type-post","status-publish","format-standard","has-post-thumbnail","category-markets","tag-asset-managers","tag-balance-sheet","tag-bloomberg","tag-business","tag-fed-funds-rate","tag-federal-reserve","tag-federal-reserve-bank","tag-markets","tag-repurchase-agreements","tag-us-treasury-building"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/161452","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=161452"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/161452\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/161453"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=161452"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=161452"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=161452"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}